Judge Scuttles Microsoft Private Suit Settlement

A federal judge Friday scuttled Microsoft's proposal to donate hundreds of millions of dollars worth of computers and software to schools to settle scores of class-action antitrust suits filed against the software giant.

The settlement proposal was "thinly funded" and could have given Microsoft an edge over its rivals in the market for school computers, U.S. District Judge J. Frederick Motz said in a 19-page ruling.

The settlement "raises legitimate questions since it appears to provide a means for flooding a part of the kindergarten through high school market, in which Microsoft has not traditionally been the strongest player (particularly in relation to Apple), with Microsoft software and refurbished software," the judge said in written opinion.

Apple Computer is a major supplier of computers to schools.

Motz said he agreed with critics of the deal who argued that the donation of free Microsoft software in the settlement agreement "could be viewed as constituting court-approved predatory pricing."

The ruling means Microsoft now will have to renegotiate the settlement or fight the scores of suits in court.

The settlement would have resolved more than 100 class- action antitrust cases pending against Microsoft. Class-action attorneys from California have argued the money should be reimbursed directly to customers who were overcharged for Microsoft software.

Microsoft's deputy general counsel Tom Burt said after the ruling that while the company was disappointed with the judge's decision, it would not appeal. He said company officials have not yet decided whether it will make any further efforts to settle the case.

The Redmond, Wash.-based company was confident it will prevail in the lawsuits. The first of the class action trials are scheduled to begin this summer in Mississippi and California, but Burt predicted the cases would be pushed back.

Microsoft shares closed down 67 cents, or nearly 1 percent, to $68.61 on Nasdaq on Friday.

Under terms of the proposed settlement Microsoft would have contributed at least $400 million to a foundation designed to get computers into schools in impoverished neighborhoods. Microsoft would have contributed more money to match funds raised by the foundation and would have donated free software.

Motz's decision came a day after Microsoft and the dissenting class action attorneys ended talks with a court-appointed mediator that were aimed at reaching a compromise.

Motz said the proposal might have been acceptable if Microsoft had agreed to fund the settlement entirely with its own cash to buy computers and software for schools rather than relying largely on donations and its own free software.

"Having donated the money to create the fund, Microsoft could then compete with other software manufacturers to sell licenses for its products to the eligible schools through the grants program," the judge said.

In his ruling, Motz also suggested Microsoft could make the deal more palatable by contributing more money for the purchase of non-Microsoft software, or more money for the purchase of new computers.

Burt said the ruling "offers a number of different approaches [that arefair and reasonable to Microsoft and our customers."

The private suits are separate from the landmark antitrust case being heard in Washington. Microsoft agreed last month to settle that case with the U.S. Justice Department and nine of the states that had joined in the suit.

Nine other states have said that settlement is inadequate and proposed their own remedies in a filing with U.S. District Court Judge Colleen Kollar-Kotelly.

Judge Motz in the Baltimore court had expressed reservations about the private suit settlement during three days of hearings on the matter last month. On Dec. 10 he ordered the two sides into mediation in a last-ditch effort to try to find a compromise.

The settling attorneys told Motz the deal is better for consumers than trying to divvy up money among individuals. Consumers would get as little at $10 apiece if Microsoft had agreed to reimburse them directly, they said.

But the California attorneys criticized it as a legal ruse that will further the company's dominant position in the computer business and give it a leg up over Apple Computer Inc. in the school market.

The California class-action lawyers had complained that the nationwide settlement was negotiated without their input, even though consumers in the state have a strong case against the company.

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